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Global supply chain management refers to exchanging information and coordinating efforts with suppliers and customers, in order to support globalization strategies determined by companies. Globalization does not only refer to the act of selling all around the world, but also to sourcing and manufacturing on the global scale, and all of this needs to be coordinated flawlessly.

Within this context, a recent book and an article we published (Golini, 2011; Caniato, Golini and Kalchschmidt, 2013) provides a conceptualization of the above-mentioned phenomena and ends up with the guidelines considered to be useful for companies in supporting their globalization strategies. First of all, four different global supply chain configurations are identified. Next, for each configuration, the best investments in the supply chain that aim to improve performance are defined. Finally, the effect of contextual variables is taken into account, and, in particular, it shows that the structure of the supply chain from one end to another (also called the value chain) holds a crucial role. The results are supported by empirical data from an international survey (International Manufacturing Strategy Survey).

The four global supply chain configurations identified

Four main configurations of global supply chain according to the percentage of sourcing, manufacturing and sales outside the continent are identified (See Figure). These configurations have been labeled and defined as follows:

Locals: local sourcing, manufacturing and distribution;

Barons: local sourcing and manufacturing, global distribution;

Shoppers: global sourcing, local manufacturing and distribution;

Globals: global sourcing, manufacturing and distribution.

Next, we considered the investments made to manage effectively the supply chain. This investments are classified in:

Sourcing-related investments, that are coordination of the flows of goods and information with suppliers, suppliers development, specific supply strategies and risk management;

Distribution-related investments, that are coordination of the flows of goods and information with customers and specific distribution strategies.

Locals, as a general tendency, invest less than the others; specifically, Locals invest less than Shoppers on supplier development and distribution strategy; Locals invest less than Barons in coordination with suppliers; Locals invest less than Globals in supplier development.

Finally, looking at the performance (cost, quality, delivery, lead time, flexibility), we found that every cluster can benefit from investment in the supply chain, usually in more than one performance indicator. However, looking at each cluster we found more detailed results. In particular,:

Locals can further improve their delivery, lead time and quality performance if they review their distribution strategy and implement supplier development;

Barons, on the contrary, should be careful about investment in coordination with suppliers and customers, as this appears to be detrimental for their quality performance;

Shoppers benefit from every supply chain investments, without specific areas that are more or less beneficial;

Globals receive very little help from investments in the supply chain, as their effect is limited to improve flexibility performance. Probably, this can depend on the many different sub-configurations that Globals can have and that make investment in the supply chain more or less beneficial.

This work offers a new perspective on global supply chain management useful for research and practice. Results provide evidence of the different configurations of globalization that can and are adopted by firms, providing some hints on the characteristics of each of them, which can help managers to define their globalization strategy. Moreover, this research shows which investments in the supply chain are more beneficial to improve the performance according to the different configurations.

In the last february, I posted an article that points out the importance to undertake supply chain risk management (SCRM) practices to deal with the fragility of upstream networks. However, one should be concern about the efficacy and the cost of these practices.

The question is … Are there drawbacks coming from their adoption? The answer is quite simple: YES, THERE ARE!

In this post we are going to shed some light on the dark side of SCRM. On the base of our research findings (Gualandris and Kalchschmidt, 2012), we suggest that managers should bear in mind an acceptable cost-benefit trade-off when setting the adoption of SCRM practices.

Supply network stability can be achieved by employing different risk management levers:

Two (or more) vendors for each supply, one of which may dominate the others in terms of business share and performance. In this way companies reduce vendors’ moral hazard risk and in case of chain disruptions can effectively react supporting minor switching costs;

The same practices, anyway, can produce negative impact on performance, both at the company level and at the supply chain level. Some examples below:

Dual or multiple sourcing: on one hand, focal firms face higher transaction costs due to the duplication of procurement processes and the higher potential for frictions. On the other, companies buy at higher purchase price (back-up suppliers have to support specific investments that increase prices and focal firms cannot obtain discounts due to small ordered quantities). Further, dual sourcing is can be less conducive to suppliers responsiveness than single sourcing strategies;

developing vendor rating programs and increasing suppliers development and coordination require focal firms to allocate large amounts of resources. Moreover, as soon as managers engage in the selection and coordination, this immediately translates into the risk of opportunity costs associated to the unselected alternatives;

SCRM practices could lead to an increased supply base complexity (e.g., high number of suppliers and high competitiveness among them) that in turn might negatively impact orizontal collaborations and thus suppliers innovativeness.

Now, the question becomes: How should I set up an effective SCRM strategy?

Answer: to effectively approach SCRM, companies should first evaluate the criticality of the context in which they operate! Specifically they should evaluate the following sources of risk:

supply market concentration and capacity constraints. Under such consitions, supply risk became more relevant because suppliers’ opportunism is more likely to occur and firm’s room for maneuver is also reduced (e.g., companies have less choices);

High purchases’ complexity and specificity. In this case, companies strongly depend on suppliers and the occurrence of a supplier’s failure to delivery results in the firms’ temporarily inability to satisfy customers (e.g., companies cannot easily switch from a supplier to the other)

Uncertainty related to technology and market changes. On the one hand, it requires a greater suppliers’ agility and so increases the likelihood of a supplier’s failure; on the other hand, it requires increased interaction between buyer and supplier and thus increase the negative impact of supply risk on organizations;

Global sourcing. In comparison to local sourcing, it is usually associated with increased uncertainty (e.g., exposition to hazardous events such as hearthquake or tzunamy), poorer transparency and visibility, as well as higher communication and cultural barriers with foreign suppliers.

The adoption of SCRM practices (e.g., the degree of investment in such practices) should be settled coherently with the risk conditions the company is facing, so to avoid unpleasant consequences (e.g., risk) and optimize trade-offs characterizing such practices. Indeed, our recent empirical investigation reveals that designing properly the adoption of SCRM practices is an important issue for companies: business leaders are those that operate coherently with risk conditions characterizing the environment in which they are active! An improved undertanding on how to manage risk propoerly would allow you to improve the robustness of your operations and, at the same time, manage your internal resources (e.g., human and financial capital) efficiently, overcoming your competitors!

Global souring is often seen as a way to reduce costs, but when considering all the implied costs (for instance, taxes, transportation, insurances, etc.) the costs can become even higher. To analyze how to keep these costs down, we classified companies in the following way:

The green group represents locals who purchase mainly within their region, the blue group identifies those performing global sourcing from around the World with higher procurement costs and, finally, the red group represents global enterprises that source in the world but with competitive procurement costs. Of the 585 plant considered within the IMSS V database (www.manufacturingstrategy.net), 302 are green, 101 are blue and only 48 are red.

So what do red companies different? We compared their criteria of selection of suppliers and the investments made in the supply chain.

The selection criteria are very similar among the groups: the most important factors are: quality of product / service and delivery performance (that is, delivery speed and reliability). Lowest price comes third also for global sourcing companies. Interestingly, the main difference between the red group and the others are on the less important factors: logistical costs, innovation and co-design and availability to share information.

When looking at the investment in the supply chain the difference between the red group and the others is much clearer. Companies performing global sourcing competitively, do invest more in coordination with suppliers, supplier development and vendor rating and in reviewing their supply strategy for instance, through supply base consolidation.

Figure 2 – Investment in the supply chain in the last 3 years (measured from 1 to 5)

In conclusion, the companies in the red square , that are those performing global sourcing at lower costs, seem to adopt a collaborative approach with their suppliers. These companies select few suppliers on their willingness to establish long-term relationships and then they invest a lot in sharing information and take joint decisions.

However, the literature reports several risks in this strategy that should be carefully considered. First, when sharing information, there is the risk of information spill-over and suppliers can even become competitors. Next, in emerging markets there are constantly new suppliers available, so it is important to continue scouting the market seeking for the best opportunities and be ready to switch supplier. In our sample, for instance, red companies are also those that use significantly electronic instruments to scout new suppliers. Finally, large global suppliers require high volumes and many orders so bind them with long term contracts con be difficult and not viable to smaller companies.

When investing across borders, companies may incur in several problems not experienced at the domestic level and these problems can change from country to country (World Bank Group, 2010). Moreover, managing a global manufacturing network can pose some issues to the profitability of the company: because of that, in past years, many companies backshored the production home (Kinkel & Maloca, 2009).

One of the key aspect, even if under investigated, is the strategic reason why the company moved the production abroad.

To analyze the problem, we used data collected in 2009 within the fifth edition of the International Manufacturing Strategy Survey (IMSS 5). We selected only Western European companies, and, in particular, 227 companies provided information for this research. Companies are mainly small sized (47.6% of the sample) but also medium and large companies are represented. Different industrial sectors from the assembly industry are considered, mainly from the manufacturing of fabricated metal products, machinery and equipment.

The problem is that for European countries literature does not provide much evidence about the differences in the strategic reasons between offshoring (defined as moving the production outside Europe) and nearshoring (defined as moving the production to another country within Europe).

Our data show that for both nearshoring and offshoring the cost driver (that is, seek for lower input and work cost) is the most important. Then, for nearshoring, the entrepreneurial driver (that is, seek for new markets, establish new business relationships, follow customers, react to competitors…) see and resource driver (that is, seeking for new technologies and skills) follow, sharing the second place. On the contrary, for offshoring, the entrepreneurial driver follow and resource driver comes last (Table 1).

Table 1 – Comparison of the reasons for offshoring and nearshoring (1-5 scale)

Nearshoring

Offshoring

Mean

Rank

Mean

Rank

Cost driver (seek for lower operational costs)

2.7

1

2.7

1

Entrepreneurial driver (seek for new markets, establish new business relationships, follow customers, react to competitors…)

2.1

2

2.2

2

Resource driver (seeking for new technologies and skills)

2.2

2

1.9

3

Next we looked at the performance obtained measured as the Return Of Investment in the last three years:

For nearshoring the entrepreneurial driver is significant in explaining a higher performance

For offshoring, the resource driver, despite its lower importance (Table 1), has a strong positive and significant impact on the performance.

In conclusion, we did not find any significant difference in business performance among companies that offshored or nearshored. This highlights that is not where the companies invest that matters, but how. In particular, companies should look at moving the production abroad as a mean to conquer new markets (entreprenurial driver) or find new skills and resources, rather than a way to reduce costs.

Vendor Managed Inventory (VMI) is an operating model in which the supplier delivers its good to the customer but the actual sale is postponed after the actual use/sale by the customer. The supplier, which can be a manufacturer, reseller or a distributor monitors the customer’s inventory levels and makes inventory replenishment decisions regarding order quantities, shipping and timing.

The advantages of implementing VMI program can be summarized as: reduced inventory costs, better response to market changes, reduction in demand uncertainty and more flexibility in production planning and distribution.

Recentely, we focused on how VMI can support global sourcing.

As we know, there are several reasons for adopting global sourcing such as lower prices, quality technology access, access to new markets, shorter product development and life cycles, comparative advantage. However, the adoption of global sourcing often leads to some problems such as increase of inventory level because of the average inventory level depends on the supply lead time and variability, which get higher when the distance between supplier and buyer increases.

According to our analysis, the implementation of VMI can be a very effective way to reduce the inventory level for global sourcing companies.

We used the fifth edition of the International Manufacturing Strategy Survey (www.manufacturingstrategy.net) and we picked the companies with a relevant adoption of global sourcing (more than 30% of their purchases comes from outside the continent). We can see that 75% of the companies uses VMI with suppliers but only 26% declare to have a high and spread adoption.

The next histogram shows the average level of inventory (measured in days of production carried in the material and components inventory) and it is evident that when the VMI is highly implemented the inventory level decreases significantly.

Obviously implementing VMI when suppliers are far away can be difficult due to geographical and linguistic distance and the necessary conditions have to be met. However the positive impact VMI is remarkable and, especially when holding inventories is costly (like in these days), global sourcing companies should definitely consider VMI into their supply chain investments portfolio.

Nowadays, companies are increasingly scrutinized by various audience (e.g., NGOs, Social Media) and are held responsible for environmental and social performance of their suppliers (e.g., Apple, 2006; Nike 2007; Mattel, 2007; Victoria’s Secret, 2011). This is the life cycle perspective: products (and the company that is manufacturing them) cannot be truly defined sustainable whether purchased components are not designed and produced in a sustainable way.

Measuring sustainability performance: as described by Wal-Mart, indexing environmental and social performance throughout the supply chain is essential to instill sustainability into suppliers, lead higher quality and lower costs, and to help customers in their buying decisions;

Developing trust and value-added relationships along the value chain: when a sustainable supply chain has to be developed, ensuring the quality of the product and the sustainability of the operational process might be as much of an issue as building partnerships and prescribe suppliers’ commitment;

Innovating toward sustainability: addressing sustainability further upstream – at the level of product and components design – can lead to an improved sustainability as well as costs savings. A good example for that is the case of Ikea: they are looking to replace wood pallets with cardboard ones. The company expects to reduce its carbon footprint and cut its transport bills by 140 million Euro a year (look at this recent post).

However, the above conversions are difficult to develop and “supply chain management” is actually the least area in which sustainability has been integrated (i.e., McKinsey survey, Exhibit 2). First, measuring sustainability is not so straightforward: on one hand it increases upstream competition (e.g., look at the post “Indexing sustainability” by The Operation Room), and on the other new criteria and assessment procedures have to be developed (e.g., look at the post “Sustainability index hiccups” by The Operation Room). Then, the evolution of sourcing strategies and the inclusion of sustainability requires a transitory period necessary for companies to change the focus of their actions (e.g., from a focus on products and suppliers to a focus on relationships and supplier networks in a long-term perspective; from the procurement of standardized inputs to joint-value creation methodologies). For instance, according to a recent post by Harvard Business Review, “nowadays innovation partnerships with vendors don’t yet represent a procurement priority” and “business world innovations occurs when we bypass or disintermediate procurement … this is somewhat contrasting: vendor/partners — who are compensated by procurement — end up having to explain away or conceal the bootleg or graymarket innovation projects they’re billing for … This dynamic is unsustainable… procurement has to become a genuine facilitator, enabler and champion of the innovation ecosystem”.

Thus, to effectively pursue the above supply chain conversions, companies need a transitory period for developing new capabilities (note that, according to exhibit 5 of McKinsey survey, three of the barriers that prevent companies from capturing potential value from sustainability initiatives are: the lack of key performance indicators, insufficient resources and lack of right capabilities and/or skills).

Sustainable supply chain management (SSCM) is also increasingly debated by academicians: more than three hundred papers were published on such issues during the last decade (e.g., Seuring and Müller, 2008). During the conference organized by the International purchasing and supply Education and Research Association (i.e., 2012 IPSERA conference), 17 papers (out of 124) were presented that deal with supply chain sustainability, witnessing that the academic community is greatly interested to the topic. Among the others, the empirical research that has won the 2012 IPSERA best paper award (i.e., Golini et al., 2012) offers relevant contributions on supply chain conversions and the role of companies’ supply management capabilities. Specifically, the paper points out that, although internal investments (e.g., initiatives to improve social reputation as well as initiatives to reduce energy consumption and waste of internal operations) represent the first step toward sustainability, industrial firms should then focus on supply chain management investments (e.g., restructuring the supply base, improving suppliers’ selection, development and coordination) and sustainable supply chain management initiatives (e.g., monitoring CSR of upstream partners, developing life cycle analysis involving suppliers) since they significantly contribute to firms’ sustainability performance. On one hand, SCM investments help in (1) improving companies’ ability to manage strategic supply relationships for sustainability and innovation (2) increasing visibility and reducing moral hazard within supply chain, as well as (3) improving cooperation and inter-organizational learning among partners. On the other, SSCM initiatives entail problem-solving routine involving suppliers and can instill additional capabilities in the company’s organization.

Concluding, supply chain sustainability seems to be the new business challenge: it represents a big opportunity for companies to improve their footprint and to increase their competitive advantage. Nevertheless, firms should wonder whether they hold the right level of resources and capabilities before to rely on SSCM investments.

References:

Seuring, S. and M. Müller (2008). From a literature review to a conceptual framework for sustainable supply chain management. Journal of Cleaner Production 16, 1699-1710.

A recent post by the University of Nevada points out that on the top fortune 500 firms in America, almost all are committed towards sustainability. Replicating such analysis within the Italian context, we found similar results. We focused on the 10 Italian companies that rank on the top fortune 500 global firms. As shown in table 1, 9 of them maintain webpages on sustainability and have published CSR reports during the last decade. Furthermore, 6 of them were found on the last Dow Jones Sustainability Index (DJSI). Additionally, by looking at CSR management network, Soliditas Foundation, Ethics footprint and Accountability rating (i.e., Italian networks of companies that are pushing forward sustainability campaigns), we’ve discovered that almost 180 big and well-known Italian firms are engaged in environmental programs and social initiatives (see table 2).

Apparently, we can provide a positive response to our question: nowadays sustainability represents an hot topic for the business community. Accordingly, a recent McKinsey survey points out that “many companies are actively integrating sustainability principles into their businesses and they are doing so by pursuing goals that go far beyond earlier concern for reputation management”. Specifically, saving energy and reducing waste of operations help companies capture value through return on capital and represent the main motivators for companies investments toward sustainability”. Managing corporate reputation and responding to regulatory constraints appears to be respectively the third and the fourth motivators (see Exhibit 1)

A second interesting finding of the McKinsey survey regards the economic returns of sustainability initiatives. In the report it is clearly stated that: “In our sixth survey of executives on how companies understand and manage issues related to sustainability, this year’s results show that, since last year, larger shares of executives say sustainability programs make a positive contribution to their companies’ short- and long-term value. Specifically, they expect operational and growth-oriented benefits in the area of cutting costs and pursuing opportunities in new markets and products”. Such McKinsey’ findings are aligned with what discovered by the 2011 Accenture survey. The focal points of the Accenture’s report are: (1) sustainability motivators and (2) sustainability benefits. First, “top motivations for sustainability are a genuine concern for the environment and society (cited by 53% of respondents), reducing energy and material costs (50% of cases) and responding to customer expectations (47%)”. Second, “the benefits resulting from firms’ sustainability initiatives have exceeded executives’ expectation in the 72% of cases”. As stated by Bruno Berthon (Managing Director of Accenture) “the irony is that … who don’t enjoy these benefits are likely the ones who think sustainability is peripheral to their business”.

Hence, it seems that companies are increasingly paying attention to sustainability. The reason for this relates first to the executives’ personal committment to transact a business in a manner expected and viewed by society as being fair and responsible, even though not legally required. However, a large part of investments are undertaken in order to increase operations’ efficiency and achieve cost benefits. A relevant role is also played by market forces: firm reputation is still at the center and the customers concerns of sustainability exerts a significant effect on firms behaviors. Finally, regulatory pressures appears to be less critical in explaining companies posture towards environmental and social issues: many business leaders would like more government incentives to encourage them to act (e.g., 2011 Accenture survey).